How to hire and pay independent contractors in Japan

The Japanese economy is ranked the third-largest in the world, and the country also has a solid tech and telecoms infrastructure. These factors allow for easy communication between businesses and remote workers, including independent contractors. For businesses that are looking to expand their team internationally, hiring independent contractors in Japan is a viable option. 

As with most other countries, employing contractors involves ensuring compliance with local labor laws and taxes. You also have to make sure that you classify your workers correctly so that you don’t put your business at risk of misclassification. 

But there’s no need to stress. In this article, we explain what you need to know before you decide to hire and pay independent contractors in Japan. Before diving into the specifics of labor law and compliance practices in Japan, let’s have a look at some unique considerations of contractor management in the country.

Unique considerations of managing contractors in Japan

Japan has a thriving business environment, making it an attractive talent powerhouse for companies that are looking to expand operations. A key consideration that an HR leader or hiring manager should keep in mind before hiring contractors in Japan is worker classifications and legalities of contract work.

Like most countries, Japan makes a distinction between self-employed contractors and employees. This difference is reflected in various aspects of Japan’s employment legislation and social treatment, from taxation laws to benefits. 

What are the labor laws in Japan? 

In Japan, laws that regulate self-employment are defined by the Japanese Civil Code and the Labor Standards Act (LSA). 

A boom in the gig economy brought on by the pandemic has given rise to an increasing number of individual contractors in Japan. In recent years, Japanese legislators have recognized their importance and are making changes to protect the rights of freelance workers or independent contractors. 

The business culture when it comes to freelance work in Japan is still old-fashioned, with many employers relying on verbal agreements rather than written contracts. However, this has caused problems around compensation where the employer has been accused of delayed payments, reduced wages, or in some cases, avoiding payment altogether. 

The government is updating its legal framework to bring legislation in place for independent contractors who are not protected by the country’s labor laws. According to proposed labor laws, employers looking to hire independent contractors must create digital or written contracts outlining job descriptions and payment rates. 

It’s always good practice to draft a contractual agreement that clearly states the duties and responsibilities of the independent contractor. This document must:

• State the period of the employment contract and job description. 

• Specify place of work and working hours (overtime, rest period, break-time).

• Include details of calculation and payment of wages.

• Specify the terms that end the contract, as well as notice periods. 

When you’re hiring global contractors, it can be a hassle to stay on top of ever-changing employment laws and compliance requirements. A contractor management platform like Remote can do the heavy lifting for you by helping you create locally compliant contracts and minimizing your contractor misclassification risk

Tax and compliance practices for hiring independent contractors from Japan

If your company is based in the United States, you must submit certain paperwork for your independent contractors that are based in Japan. 

For instance, for each contractor you hire in Japan, you must collect the W-8 BEN Form and submit it to the Internal Revenue Service (IRS). This form is necessary to determine the status of non-residents for taxation purposes. If you’re working with an independent contractor in Japan via a foreign entity, you have to submit the W-8BEN-E Form to the IRS.

Remote’s contractor management platform can help US companies generate the right forms to ensure that they are in compliance. Learn more about Remote’s time-saving tax compliance feature, which is designed to make your life easier.

How do I pay an independent contractor in Japan?

Paying contractors in Japan works much the same way it does in other countries. Here, wages are mostly paid in Japanese yen and can be paid via:

• Check

• Direct deposit (ACH transfers)

• Digital payments

• Wire transfer

Contractors can also be paid by credit card, through an online transaction, or via accounting software. The amount your independent contractors are paid depends on how you decide to compensate them — by paying all of your employees and contractors the same income, for example, or by calculating wages based on the location and local costs. 

Keep in mind that if you plan on hiring independent contractors in Japan, you need to make sure that the salary package you offer meets the country's minimum wage requirement, which ranges from ¥714 ($6.46) to ¥932 ($8.43) per hour. 

When you’re making payments in local currency, there’s always the risk of losing money on currency exchange rates. There might also be transfer fees to consider, based on the amount of money being paid and the number of contractors you’re managing.

Remote’s contractor management system can easily manage the contractor payment process for you. You can process invoices, make payments in the local currency, and ensure that your contractors are paid compliantly and on time. 

What are the risks of misclassifying Japanese independent contractors as employees?

Regardless of the country you are looking to hire in, it is always important to determine upfront whether you’re classifying your worker as an employee or an independent contractor.

The LSA distinguishes between a worker and an independent contractor. Irrespective of their occupation, an individual in Japan is defined as a “worker” (or employee) if they collect “wages” or are “employed at a business,” according to the Japanese Labor Standards Act. Employees are protected by Japan’s employment law, unlike independent contractors. This means they are entitled to benefits such as health insurance, pension contributions, unemployment insurance, paid annual leave, and maternity/paternity leave.

Independent contractors or self-employed individuals are not considered “workers” as they have the freedom to work in their own time and at their own discretion. They are usually hired contractually by a company or individual to perform a particular job. They are not protected by Japan’s employment law and are not entitled to benefits either.

An individual’s employment status is decided not by their job title or contractual obligations, but by their working conditions or the way they are treated by the employer.  Some questions to consider while deciding whether a person is an employee or contractor include: 

• Are they under someone’s control? Are they obliged to follow specific instructions regarding their work?

• Do they have the right to refuse assignments or projects?

• Do they have a fixed place and time for work?

• Are they receiving fixed wages in exchange for the work?

Sometimes a company might unknowingly or intentionally treat their contractors as employees so that they don’t have to offer benefits or comply with fair labor practices. If your company misclassifies employees as independent contractors, it may face heavy fines, penalties, or — in severe cases — run the risk of a stop-work order or ban. Additionally, you don’t have to worry about your company’s IP and invention rights. With Remote, you can be assured that you have a good contractor agreement that can provide the maximum protection for your IP.

How do I convert an independent contractor in Japan to an employee?

Employment laws regarding contract labor in Japan are changing. So, it might be a good idea to hire your contractor as an employee and avoid compliance issues.

There may be other instances where you could want to convert your independent contractor to a full-time employee. For example, you might want to retain your contractor for longer or make them a permanent part of your team. Some contractors may want the security of long-term employment and may even request for a change in employment status. 

Additionally, hiring an employee instead of a contractor could lead to significant cost savings in the long run. At the end of the day, it all comes down to your response to the following questions:

• Does converting a contractor to an employee benefit the company?

• Does it benefit the contractor?

If you believe that your company is better off treating your contractors as employees, then it is probably best to classify them as employees. Once you’re ready to classify your contractors as employees, you don’t have to worry about updating your contract or additional compliance requirements. 

The best way to hire international contractors in Japan

Japan is a global leader in technology and communications, which means that it’s also an attractive place to find skilled contractors. Sure, there are some challenges involved in hiring international contractors in Japan. But, that shouldn’t stop you from expanding your team in Japan and growing your business. 

You can rely on Remote's contractor management platform to help you navigate all the complexities of hiring, paying, and managing contractors in Japan or any other country. 

Remote offers the fastest, easiest, and safest way to hire international contractors — whether this is automating your payments and invoices, generating localized contracts, or managing tax compliance.

Learn more about how you can use Remote’s international contract management software to help you manage your contractors and grow your business. Ready to start onboarding contractors in Japan? Sign up with Remote and get started today!